In Synergy Lighting Ltd v HSBC Ltd,(1) the High Court recently dismissed the plaintiff company’s application to continue an ex parte injunction to restrain the defendant bank from presenting a winding-up petition against the company. The company claimed that it had already secured the bank’s debt and that, therefore, the bank could not demonstrate that it was unable to pay its debts for the purposes of Section 178(1)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32). The court considered the company’s argument to be misconceived and noted that a petitioner need not rely on a statutory demand, under Section 178(1)(a), to commence winding-up proceedings – for example, there are other ways in which a petitioner could prove that a company is unable to pay its debts. The court also noted that the way in which the company had obtained the original ex parte injunction left much to be desired.
The company was indebted to the bank by way of banking facilities and sought to secure repayment by executing an assignment of certain accounts receivable in favour of the bank in September 2016. The accounts receivable appear to have been future fees to be earned by the company under certain energy management contracts with its customer in Indonesia.
On 19 August 2020 the bank served a statutory demand on the company for the amount of approximately HK$48 million. It appears to have been accepted that, after some recent repayments, approximately HK$35 million remained outstanding to the bank, which was an undisputed creditor.
On Friday, 11 September 2020 (which was after the three-week period specified in the bank’s statutory demand), the company obtained an ex parte injunction to restrain the bank from presenting a winding-up petition against it. It appears that on that day (at 11:27am), the company’s legal representatives informed the bank that they had instructions to apply for an injunction, but no further notice was given to the bank until about 20 minutes before a court hearing at 5:30pm on the same day. The bank had been served with the company’s supporting affidavit but, apparently, with no other supporting materials (eg, exhibits, legal submissions or authorities). The judge who granted the ex parte injunction does not appear to have been made aware of the short notice or the lack of materials given to the bank.
It also appears that the bank was not informed of the outcome of the court hearing until Monday, 14 September 2020 or provided with a full set of the papers in support of the application until Tuesday, 15 September 2020.
The company applied for an order to continue the ex parte injunction at an inter partes hearing on 18 September 2020 (one week after the ex parte hearing). The company argued that the presentation of a winding-up petition would amount to an abuse of process because it had already adequately secured the debt by executing the assignment of accounts receivable in September 2016. Therefore, the company claimed that the bank should have been reasonably satisfied that the debt had been secured and that the company was able to pay its debts for the purposes of Section 178(1)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance.
The court dismissed the company’s application and discharged the ex parte injunction.
The court noted that Section 178(1) of the ordinance is a ‘deeming provision’ by which a company may be said to be unable to pay its debts (by reference to an unsatisfied statutory demand) which, in turn, is a ground for winding up.(2) However, the court also noted that this is not the only way in which a petitioner may prove that a company is unable to pay its debts and, therefore, should be wound up. As the court stated, “[a] demand under section 178(1)(a) is not a sine qua non for winding-up”.(3)
The court held that even if Section 178(1)(a) was not satisfied, and the deeming provision was inoperative, this was not (of itself) a ground for restraining the presentation of a winding-up petition. Further, the court noted that a secured creditor may, in any event, petition to wind up a debtor company.(4)
As a fallback position (described by the court as an “afterthought”),(5) the company appears to have argued that the injunction only restrained the bank from presenting a petition based on Section 178(1)(a) and nothing more. This argument received short shrift from the court given that the wording of the injunction appears to have restrained the presentation of any winding-up petition “based on the statutory demand dated 19 August 2020”.(6)
As regards the company’s argument that it had adequately secured the debt and the bank should have been reasonably satisfied with this, the court observed:
However, as already explained, the receivables are not like an annuity or pension rights, and whilst the Company may eventually be able to find a buyer, there is in my view no basis to say that the Bank is acting unreasonably if it does not have confidence that the receivables would be readily marketable by it at a price near the range of values asserted.(7)
The outcome in the case is no surprise. The court’s judgment is a useful review of some of the basic principles that underpin a creditor’s right to present a winding-up petition based on a debtor company’s inability to pay its debts.
Of particular interest is the court’s review of the evidence before it regarding the nature of the accounts receivable (the subject of the assignment by the company to the bank). It appears that a large amount of the receivables had been overdue by July 2020 and that, between June and August 2020, the company’s Indonesian customer had apparently not made any payments to it under the energy management contracts. By this time, the bank’s patience may have run out. If the company had been unable to sell the receivables, in order to generate revenue, it is (on the face of it) difficult to see how the bank had been allegedly unreasonable in not being satisfied with the security.
Finally, the court was critical of the way in which the company had applied for the ex parte injunction. First, the application does not appear to have been taken out as expeditiously as it should have been. Second, the judge who granted the original ex parte injunction does not appear to have been aware of the short notice or the lack of supporting documents given by the company’s legal representatives to the bank. The case is another example of the challenges presented when making an ex parte application (for further details please see “Ex parte injunctions with or without you“) and the possible costs orders that can follow (for further details please see “Top court confirms basis for indemnity costs“).
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